Insurer’s Payout Scheme Dodges Consumer Suit

(CN) – Lincoln National Life Insurance Co. did not self-deal or violate labor law by profiting off funds that backed accounts used to pay life insurance beneficiaries, a Philadelphia federal judge ruled. The underlying lawsuit, which required the court to revisit “a difficult issue of first impression in the Third Circuit,” claimed that Lincoln circumvented issuing death-benefit checks by creating accounts that allowed the beneficiary to draw down the benefits as they chose, according to the court. This allegedly let Lincoln invest the proceeds and make a profit until the beneficiary chose to make a withdrawal. Lead plaintiff Connie Edmonson said the practice constituted unjust enrichment under the Employee Retirement Income Security Act. In an earlier ruling, the Eastern District of Pennsylvania determined that Lincoln had unquestionably handled the funds as Edmonson described. The precise and rather technical issue considered in the current opinion is whether the insurer of the ERISA-governed employee welfare benefits plan – the terms of which do not specify the method of payment of life insurance proceeds – was acting as an ERISA fiduciary when it held and invested for its own profit the funds backing retained asset accounts used to pay plan beneficiaries their proceeds. Edmonson claimed that, through the use of retained asset accounts, Lincoln profited from the spread it earned on the funds backing those accounts and the interest it paid to beneficiaries. For Edmonson to prevail, the court said she would have to prove that Lincoln acted as an ERISA fiduciary when it invested funds backing her account for its own profit. In practice, however, Lincoln creates accounts for beneficiaries with the full amount of proceeds owed to the account holder. When a check is drawn on the account and presented for payment, it transfers funds to the bank serving the account instead of transferring funds into the account. Until that time, the funds backing the account are held in Lincoln’s general account with other, nonsegregated assets. “Lincoln was required to comply with the other terms of the policy in selecting a method of payment, including the requirement that it pay benefits ‘immediately’ upon proof of claim,” U.S. District Judge Michael Baylson wrote. “And Lincoln did just that. Indeed, the day after Lincoln approved Plaintiff’s claim for benefits, it notified her that it had established a SecureLine account in her name and had credited it with the amount of death benefits owed to her.” “Lincoln also provided her with a checkbook so that she could draw on the account as she pleased,” the 33-page decision continues. “Once it took these steps, Lincoln had provided plaintiff all the benefits called for by the plan. To be sure, at any point thereafter, plaintiff could simply writer a check up to the full balance of her account and receive the total life insurance proceeds owed to her.” More importantly, once Lincoln established Edmonson’s account, credited it with the amount of death benefits owed to her, and issued her a checkbook with which she could draw on the account, the company relinquished and shifted all practical control of the plaintiff’s proceeds to her directly, Baylson found. “From that point forward, Lincoln’s remaining obligations were simply and clearly administrative and ministerial,” he wrote. In fact, only a few months after the account’s creation, Edmonson withdrew the entire amount from the account in a single draft, Baylson wrote. “The court recognizes that Lincoln had custody over the funds backing plaintiff’s SecureLine account when it invested them for its own profit,” the decision states. “Indeed, Lincoln retained those funds in its general account, and only transferred funds to her SecureLine account when she wrote a check against the account. “Although this arrangement suggests that plaintiff bore the risk of loss in connection with the funds backing her account, Lincoln did not become an ERISA fiduciary by virtue of mere custody of those funds,” he continued. “Rather, the overriding consideration is that Lincoln did not have practical control of them. Therefore, Lincoln was not acting as an ERISA fiduciary when it retained the funds backing plaintiff’s SecureLine account and invested them for its own profit.” Baylson granted the insurer summary judgment and denied all remaining motions as moot.